Ken’s fund choice for the week
Written by Charlie Palmer on 10/08/2018
Schroder European Real Estate Investment Trust-ISIN- Gb00By7R8K77

Launched in December 2015, the Schroder European Real Estate Investment Trust targets growth regions in Continental Europe and aims to provide a regular and attractive level of income together with the potential for long term income and capital growth.
With a certain degree of uncertainty surrounding the UK commercial property market (slowing economic growth, BREXIT) increasing number of investors are looking to continental Europe for their real estate exposure, and the SERE would seem to tick many boxes. 
Ideal for an investor seeking above average income, with predominant exposure to European economies, and exhibiting low correlation with a number of other asset classes

Following a recent meeting with management members, I update my initial note as below,
Results released on December 06,2017, show Net Asset Value increasing 13% over the last full year (September Year End) to Euro 1.33, and dividend pay-out moving towards the company target of 5.5% on issue price. At current price of 111.5p, the stock trades on a discount to NAV of approximately 6% with a prospective annual yield of 5.9% payable in Euros or sterling.

  • Eurozone economic data continues to remain positive, growing faster than the UK over recent quarters and this relative outperformance is expected to continue. Private business surveys point to further growth and property and investment activity remains robust. A recent sample of German companies, for instance, showed rents rising between 4% and 6% over the last twelve months.
  • SERE invests in cities/regions characterised by large liquid real estate markets such as Amsterdam, Berlin, Hamburg, Munich and Paris where local GDP is outperforming the national averages.
  • The Trust is managed by Jeff O Dwyer, an experienced real estate investment manager, who is supported by nearly 100 property specialists located in key European hubs. The team see over Euro 2 billion of introductions each month, with the near-term pipeline comprising over Euros 115 million yielding between 5.8% and 7.5%.
  • The process/risk control involves holding the bulk of the portfolio in stable income producing developments (approx. 70%) while adding a greater capital return component to the other 30% via refurbishments, change of use, lease extensions etc. A large portion of the rents are index linked.
  • The purchase of a data/mixed user investment in Apeldoorn in February this year, on a very attractive 10% income yield leaves the fund fully invested.
  • Geographical weighting is currently Germany (30%), France (50%), Holland and Spain (20%) by value.
  • The top five properties were in Paris, Seville, Berlin and Biarritz. 
  • Portfolio is almost 100% occupied with a 6.8 years average lease time and net property income yield of 6%
  • Loans of approx. Euros 73 million (compared with assets of approx. Euros 233 million), are usually employed on a loan to individual property asset basis, and in aggregate enjoy a maturity of about 6.6 years and interest rate of 1.3%
SERE targets a fully covered Euro yield of 5.5%(7.5 Eurocents on a Euro equivalent issue price of Euro1.37). Dividends are declared in Euros, and paid quarterly, with UK shareholders being given the option of sterling or Euro pay-outs. Lease structures vary across Europe, but most typically have some form of inflation linkage, providing support for the target dividend. 
Current discount to NAV (Euros 1.347-December 31st, 2017)) represents a good level to be obtaining exposure to mainstream European property.
  • The portfolio seeks to enhance property returns with a relatively modest level of gearing currently 25% LTV, (35% target LTV). The blended all in debt cost is 1.3% with an average maturity of around 6.5 years.
  • Closed end fund structure with daily liquidity via a listing on the main market of the London Stock Exchange.  

Sources (LSE,company management and Numis Securities)

UNCLAIMED CAPITAL ALLOWANCES

A whopping 64% of firms recently surveyed own their own commercial property.  But amazingly, according to NGS Corporate, a debt management firm, only a minority or  24% are aware of the available Capital Allowances tax relief.  Firms also significantly underestimate the value of a claim, putting it at just under £20k when in reality an average claim is £46k.

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